Exclusive: Activist Jana digs in for long Agrium battle

" didn't measure the Canadian reaction to an activist who would suggest that management could be doing more for the shareholders," said one Agrium shareholder, a top 10 holder as of June 30.

ACTIVIST'S FIGHT

A U.S. based investor, who holds roughly 1 percent of Agrium's shares, said Jana's efforts to persuade other investors could lose steam if the company reports good third-quarter earnings next month and the stock continues to perform well.

For Jana, however, Agrium's moves are signs that it is making headway in getting the company to heed its demands. Jana argues that since it first started discussions with the company and other shareholders at the end of May, Agrium shares have risen about 35 percent.

The top 10 shareholder, who spoke on the condition of anonymity, said: "I think management has been stonewalling - it is an old-fashioned reaction. Let management show us that what Jana has suggested won't result in additional value in the pockets of a shareholder."

Agrium for its part has said it has given detailed arguments against Jana's proposals.

In August, Agrium said its board had spent two months with its adviser Morgan Stanley evaluating a spin off of its retail business. The bankers believe the company's retail business would likely trade around 8 times its estimated earnings before interest, taxes, depreciation and amortization as an independent company.

Information provided by the bank cites third-party research analysts as already valuing the business in the 7 times to 8 times range, "suggesting virtually no upside from a separation."

The bankers have also told Agrium's board that there is a risk that the wholesale business, if it were separated from the retail unit, could trade below the valuation that is implied in such a model, resulting in a lower value overall.

A sale is a worse option, these bankers argue. The retail business has a low tax basis, which would trigger a sizeable tax bill if Agrium were to sell it.

The sources close to potential bidders said the retail business, which has an estimated EBITDA of $900 million, could be valued around 9 times that profit for a potential $8 billion leveraged buyout, which would be by far the largest private equity transaction in the sector.

Jana has argued, however, that Agrium's management has been inconsistent on the valuation of the retail arm, noting that Agrium CEO Michael Wilson told shareholders at an investor event in 2011 that he believed the business should be trading at 11 times EBITDA.

"We think it is unconscionable that, after years of arguing that retail was undervalued based on where selected peers were trading, when we challenged them to address this undervaluation, the company suddenly switched to new lower multiple peers to argue the business isn't undervalued after all," one of the sources close to Jana said.

(Additional reporting by Michael Erman, Soyoung Kim and Greg Roumeliotis in New York and Euan Rocha in Toronto; Editing by Paritosh Bansal and Edmund Klamann)